by Doug Casey, Casey Research:
Subprime loans are going bad again.
A “subprime” loan is a loan made to someone with bad credit. If the term sounds familiar, it’s because lenders issued millions of subprime loans during the early to mid-2000s.
Banks made these risky loans thinking housing prices would “never fall.” When they did, subprime borrowers stopped paying their mortgages. The U.S. housing market collapsed, triggering the worst economic downturn since the Great Depression.
These days, lenders aren’t making as many reckless mortgages. But subprime lending is alive and well in the auto market…
Since the financial crisis, subprime auto lending has exploded. According to Experian, subprime auto loans now make up more than 20% of all U.S. auto loans.
Millions of Americans with bad credit now own cars they should have never bought in the first place. Risky subprime loans have also made the auto loan market incredibly fragile.
Right now, people are falling behind on their car loans at an alarming rate. As you’ll see, this isn’t just a big problem for lenders and car companies… It could also spell trouble for the entire U.S. economy.
• Subprime auto loan delinquencies are skyrocketing…
CNBC reported on Friday:
Delinquencies of at least 60 days for subprime auto loans are up 13 percent month over month for July, according to Fitch Ratings, and 17 percent higher from the same period a year ago.
Folks with good credit are falling behind on their car loans too. CNBC continues:
Even prime delinquencies are on the rise — Fitch Ratings’ survey said that last month’s prime auto loans were 21 percent more delinquent than in July 2015.
Prime loans are loans made to people with good credit.
• The auto industry is preparing for more delinquencies…
Last month, Ford (F) and General Motors (GM) warned that rising delinquencies could hurt their businesses in the second half of this year.
According to USA Today, both giant carmakers have set aside millions of dollars to cover potential losses:
In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.
General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.
• Investors who own subprime loans are taking heavy losses…
USA Today reported on Thursday:
[T]hese loans are packaged into bundles which are sold to investors, much like mortgages were packaged into bundles a decade ago before rising interest rates caused many of them to default, eventually triggering the deepest economic crisis since the Great Depression.
The annualized net loss rate — the percentage of those subprime loan bundles regarded as likely to default — rose 7.39% in July, up 28% from July 2015.
You may recall that Wall Street did the same thing with mortgages during the housing boom. They made securities from a bunch of bad mortgages. They marked them as safe and then sold them to investors.
When the underlying mortgages went bad, folks who owned these securities suffered huge losses. These dangerous products allowed the housing crisis to turn into a full-blown global financial crisis.
• By itself, a collapse of the auto loan market probably won’t trigger a repeat of the 2008 financial crisis…
That’s because the auto loan market is much smaller than the mortgage market.
The value of outstanding auto loans is “only” about $1 trillion. While that’s an all-time high, the auto loan market comes nowhere close to the $10 trillion residential mortgage market.
Still, we’re keeping a close eye on the auto loan market.
If Americans are struggling to pay their car loans, they’re going to have trouble paying their mortgages, student loans, and credit cards too.
This would obviously create problems for lenders and credit card companies. It will also hurt companies that depend on credit to make money.
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